Dollar at 3-week euro high, yen rallies on G7 talk

German official says yen weakness will be discussed at G7 meeting

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar rose to a three-week high versus the euro, but traded lower against the yen Thursday, after a German official said the weakness of the yen will be discussed at the upcoming meeting of the Group of Seven leading industrial nations.

The yen rallied across the board, touching a three-week high against the euro, reversing recent sharp losses sparked by speculation that the Bank of Japan may not raise interest rates again this year. German deputy finance minister Thomas Mirow indicated the "weak yen" will be among G7 topics when the group's finance ministers meet next week.

"Clearly eurozone fiscal authorities are becoming uncomfortable with the notion of 150 euro/yen exchange rate," said Boris Schlossberg, senior currency strategist at FXCM. "The eurozone finance and trade ministers are unlikely to stand idly by as the cross holds at near record highs for fear that complacency on their part may compromise the regions export driven economic recovery."

Late in New York, the euro was quoted at $1.2731, compared with $1.2808 late Wednesday, after touching $1.2704, the lowest level since Aug. 15. The dollar changed hands at 116.44 yen, compared with 116.58 yen.

The British pound traded at $1.8746, compared with $1.8845. The dollar was last at 1.2429 Swiss francs, compared with 1.2349 francs.

Further yen strength expected

The Bank of Japan started its two-day policy board meeting Thursday and is widely expected to leave its interest rates unchanged at 0.25%.

However, speculation has risen lately that BoJ governor Toshihiko Fukui will sound hawkish by signaling that a rate hike is likely later this year.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said that risks tied to the G7 and IMF meetings this month may limit the use of the yen as a funding currency in carry trades. In yen carry trade, speculators make profits by borrowing yen at very low cost and reinvesting in higher-yielding currencies and assets.

Japan's vice finance minister for international affairs, Hiroshi Watanabe, said although forex would be a topic at the G7 meeting, there are no plans to discuss a specific currency.

Meanwhile, speaking to reporters via teleconference form the Asia-Pacific Economic Cooperation (APEC) meeting in Vietnam, Canadian finance minister Jim Flaherty also played down speculation that the yen will be on the G7 agenda, according to analysts at Action Economics.

BBH's Chandler said the yen's reversal "has been brutal" as Mirow's comments "hit a market leaning the wrong way."

"Market positioning appears to be exaggerating the true signal of Mirow's comments," he said. "Mirow might not have been sending a signal at all. Foreign exchange matters are routinely discussed" at international financial meetings, he said.

Bias toward tightening

The dollar firmed slightly after Janet Yellen, the president of the San Francisco Fed, said that with inflation already above her comfort zone, the Fed must be ready to hike rates again if necessary. "The bottom line is this. With inflation too high, policy must have a bias toward further firming," Yellen said in a speech to a business group in Boise, Idaho. See full story.

Yellen forecast an economy that was growing "somewhat" below potential over the remainder of the year and said she expects inflationary pressures to slowly unwind.

"Yellen's comments are mixed and slightly dollar-positive in the sense she is not sounding as dovish as expected," said Brian Dolan, director of research at Forex.com.

After 17 straight meetings in which it implemented quarter-percentage-point increases in benchmark interest rates, the Fed held interest rates steady at 5.25% on Aug. 8. The Federal Open Market Committee, the Fed's policy-setting panel, next meets Sept. 20.

Earlier, the greenback showed little reaction to U.S. initial jobless claims data. The number of new filings for state unemployment benefits fell by 9,000 to 310,000 in the week ending Sept. 2. Economists surveyed by MarketWatch were expecting initial claims of about 315,000. See full story.

Separately, inventories of U.S. wholesalers rose 0.8% in July, while sales at the wholesale level rose 0.4%, the smallest gain since February. Economists were expecting wholesale inventories to increase by 0.6%. See full story.

Also of note, U.S. home prices will probably fall temporarily as the housing market corrects, the National Association of Realtors said.

BoE maintains rate at 4.75%

Elsewhere, the Bank of England on Thursday held its key interest rate at 4.75%, a month after making a surprise tightening, as it balanced signals that economic growth may be slowing with persistent concerns over inflation. See full story.

The Bank of England didn't make an announcement along with the rate decision.

Sterling showed little reaction to news that U.K. Prime Minister Tony Blair will step down within the next twelve months. See full story.

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